markets globally; 2) to carefully consider, manage and regulate central clearing of swaps; 3) totrade standardized and standardizable swap instruments on transparent organized trading venues;and 4) to ensure global coordination in the adoption and implementation of swaps regulations toreduce the frequency and effect of regulatory arbitrage.
CFA Institute supports the objectives of the Proposal, namely to afford customers and customerfunds protections through risk management and monitoring, including segregation. In particular,we support enhancing risk management practices of FCMs in tandem with the oversight of theappropriate derivatives self-regulatory organizations (“DSROs”) and the CFTC. The calculationand overall safekeeping of collateral for futures, options, and OTC derivatives transactionsprovides a critical buffer in the event of default of one of the counterparties and helps managesystemic risk.The comments below introduce positions that we describe more fully in the discussion section of this document:
Given the proven problems and conflicts banks have had using internal models fordetermination of capital in recent years, we strongly oppose letting FCMs use internalmodels for calculating their own capital requirements.
While we recognize that the events surrounding MF Global’s illegal confiscation of clientfunds is a rare breach of Commodity Exchange Act rules, we believe these eventshighlight a significant weakness that, unless closed could lead to further customer lossesand loss of investor trust. Therefore, we support requirements that customer accountsremain segregated from FCM proprietary accounts, and that individuals illegally engagedin violation of these laws are held criminally accountable.
FCMs should be held responsible for covering losses occurring from their investment of customer accounts.
FCMs should have to disclose critical information about such matters as the ability of FCMs to commingle customer funds in one or more accounts, including accountsprovided by affiliates of the FCM, and that in the event of an FCM’s bankruptcy thatsuch funds are not guaranteed by a clearing entity.
Protections and requirements for foreign customers of FCMs should be as strong as thosefor domestic customers.Finally, we do not believe that the SEC and CFTC should adopt different approaches toregulating similar issues because disharmony of this kind will lead to confusion and increase thecost of dealing with the enormous complexities of the swaps market. Moreover, it would likelycreate regulatory arbitrage opportunities for firms trading OTC derivatives.
The questions we have answered and comments we have made relate to the following issues:1)
FCM risk management policies,